Deloitte counter-attacks on HKSA probe
Deloitte Touche Tohmatsu has accused the Hong Kong Society of Accountants (HKSA) of pandering to regulators by launching a probe into the firm's 1997 audit of insolvent red chip Guangnan (Holdings).
The firm is seeking to quash the regulatory body's decision to scrutinise the audit, the second such challenge to the HKSA's powers in less than two weeks.
Ernst & Young last week failed to halt an HKSA probe into a 1996 Cosco International Holdings audit following a three-day trial.
Deloitte yesterday mounted a challenge to the HKSA's decision to appoint an investigation committee without telling the firm why or without letting the firm see the relevant material upon which the decision was made.
'How can there be an informed refutation if we don't even have the opportunity to see the materials upon which a significant decision was made against our interests?' counsel for the firm, Gerard McCoy, SC, argued.
Depriving the accountants of a chance to see and respond to the materials ran contrary to previous dealings with the HKSA, he stressed.
'The Society was so overwhelmed by the need to pander to the stock exchange and other regulators, that it opposed or diverted its orthodox or normal procedures.' Deloitte was officially informed of the probe last May. However, the HKSA's decision to investigate entered the public domain through press reports in March.
This followed an announcement in February by the Guangnan board that the assets and revenue of Guangdong Enterprises (Holdings) (GDE) had been impaired by 'inappropriate accounting for various transactions and improper and irregular practices'.
Deloitte had audited Guangnan between 1984 and April last year. When GDE hit financial problems, KPMG was appointed as an adviser for a proposed restructuring. It also took over as auditor from Deloitte.
KPMG produced an audit report for the nine months to September 1998, showing trading losses to be exacerbated by 'exceptional items' totalling $2.45 billion.
The firm stated that 'at least $1.07 billion of these items represent provisions which ought to have been made at 31 December 1997 or in prior years'.
However, Deloitte claims the statement was made without consulting Deloitte, and none of the 1997 audit papers had been examined.
Moreover, 'there is no reasonable suspicion because of the irreversible conflict KPMG was in', Mr McCoy argued.
'There is a confusion of interests in this case, in which KPMG, who had a member on the council of the HKSA, have effectively allowed proceedings to be initiated against Deloitte.' The case at the Court of First Instance continues before Mr Justice Frank Stock.
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